Lieke Braadbaart

The gap between the average rate for a mortgage that is fixed over a term of two years and one that is fixed over five years has shrunk so much that it is now the lowest it's been since August 2013. This means that those looking at long-term security may only be charged 0.40% more on a five-year deal.

Mortgage gap

Much of this welcome activity comes from a less than welcome source: two-year fixed mortgage rates moving upwards. "With all the uncertainty surrounding a potential base rate rise, the average two-year fixed rate has been on an upward trajectory in the first half of this year, increasing from 2.35% at the start of the year to 2.52% this month," explains Charlotte Nelson, finance expert at Moneyfacts.co.uk.

At the same time, the average five-year fixed rate has risen by just 0.05% since January, which has allowed the gap between the two to decrease dramatically. As you can see in the table below, this gap may not be nearly as large as was seen five years ago, when there was only a 0.25% difference between the two rates, but both averages are still lower than they were then, so anyone coming to the end of a five-year deal should be able to find a better rate now.

Aug-13

Jun-16

Jun-17

Jun-18

Average two-year fixed rate

3.60%

2.57%

2.30%

2.52%

Average five-year fixed rate

3.85%

3.17%

2.86%

2.92%

Difference

0.25%

0.60%

0.56%

0.40%

Source: Moneyfacts.co.uk

Long-term security?

Of course, a gap, no matter how small, is still a gap, which is why Charlotte suggests that "borrowers looking for a mortgage now may be unsure of whether to choose a traditional two-year fixed rate deal or opt for the security of a longer-term fix." It seems that a lot are choosing the latter, however, as Charlotte found that "remortgage demand for five-year fixed rates has increased to 47% [according to LMS statistics]."

This is great news for lenders, as many are looking to shore up their mortgage book in advance of any base rate rises that may occur. "Specifically, lenders are hoping to entice borrowers onto a longer-term option by keeping their five-year fixed rate deals competitive, which is why the two-year fixed rates have sped up but the five-year rates haven't," said Charlotte.

All this combined means that based on the average fixed rates, borrowers would only have to pay £40.87 per month more (based on a £200,000 borrowing amount over 25 years on a repayment-only basis) if they were to opt for a five-year deal instead of a two-year mortgage. Given the fact that rates are likely to continue rising, this may be a smart gamble to take, as who knows how much more you'd have to pay if you were to remortgage two years from now.

As always, Charlotte therefore concludes that "borrowers considering a deal should act fast to ensure they do not miss out on the best possible products."